© REUTERS/Wolfgang Rattay

First it was Chinese goods flooding the world after leader Deng Xiaoping’s sweeping economic reforms at the end of the 1970s. Now it’s Chinese money targeting acquisitions across the globe. This latest trend has raised serious concerns, as governments fear China is making strategic investments that could affect their economies or even jeopardize national security.

The Committee on Foreign Investment in the US (CFIUS), a government watchdog organization, has been particularly vigilant as Chinese direct investment in America reached a record $15.3 billion in 2015, according to the Rhodium Group research service.  In early December, President Obama upheld the committee’s recommendation to effectively stop the sale of German semiconductor supplier Aixtron SE to China’s Grand Chip Investment Fund – a deal totaling $714 million.

It was only the third time in more than 25 years that the White House had blocked a corporate acquisition on national security grounds, and it highlights how complex the debate has become – especially as advanced technology and defense are increasingly linked. The Treasury Department said there was “credible evidence that the foreign interest exercising control might take action that threatens to impair national security.”

China’s overall strategy is quite plain: It homes in on advanced technology companies that can enable Beijing to leapfrog ahead in key industries. According to German Ambassador to China Michael Clauß, Chinese investment in Germany in the first half of this year rose 2000 percent the same period in 2015, and most of that investment landed in the high-tech sector. “It seems … they are trying to close the technological gap through acquisitions,” he told Reuters.

A Perfect Fit

That is evident in the Aixtron case. Beijing has launched a program to build up its own production of semiconductors, and Aixtron would undoubtedly fit neatly into this portfolio.  We could then see a scenario where the People’s Republic (PRC) purchases Western technology in key sectors to expand and modernize its own operations, making it more competitive with the very Western countries where it made the acquisition. Essentially, it’s the high-tech equivalent of the way China adapted foreign expertise in manufacturing at much lower costs and surpassed Western producers.

This approach also dovetails with Xi Jinping’s broader, long-term aim of pulling even with the US on the global stage. Beijing plans to pursue this larger world role on various fronts, from the South China Sea to technology. Industrial modernization is one part of the effort. The Chinese leader wants to see his country become a leading innovator by the end of this decade. “Great scientific and technological capacity is a must for China to be strong and for people’s lives to improve,” he was quoted as saying this summer by the Xinhua news agency.

If implemented successfully, the government’s “Made in China 2025” plan to enhance technology and automation is an obvious challenge to Western economies like Germany, that have until now been global leaders in advanced engineering and machinery.

There are significant reasons to believe that progress will not be as smooth as the planners in China hope; for one, the Communist Party state – which Xi is intent on preserving and strengthening – is by nature ill-equipped to implement the necessary structural reforms, while Xi’s campaign of political and intellectual orthodoxy stands in the way of innovation.

Defense applications are relatively easy for governments to identify, but the wider issue of strategic industrial competition is set to become more acute in the years ahead, especially given the rising tide of complaints from developed nations over the lack of reciprocity in China. Western companies have regularly reported obstacles in expanding their operations on the mainland and working with Chinese enterprises on an equal basis, let alone making acquisitions. Ambassador Clauß reported recently that German companies operating in the People’s Republic were feeling a “considerable rise in protectionism.”

A Safeguard Clause

That prospect seems to be prompting at least some European governments to rethink their strategy. Germany did allow China’s domestic appliance manufacturer Midea to buy into robot maker Kuka, but Berlin has reconsidered its initial approval of the Aixtron purchase; Deputy Economy Minister Matthias Machnig said new, security-related information had come to light. In the summer, Economy Minister Sigmar Gabriel had called for a safeguard clause that would allow European countries to block foreign takeovers of firms specialized in technology strategic to the EU’s economic success. German EU Commissioner Günther Oettinger wants to see a European foreign trade law to protect companies like Kuka from being bought up by non-EU entities.

Aixtron has a subsidiary in California and employs about one hundred people in the US . The company’s technology can be used to produce diodes, lasers, and solar cells, and it’s used by US defense contractors. The White House statement on the proposed acquisition said, “The national security risk posed by the transaction relates, among other things, to the military applications of the overall technical body of knowledge and experience of Aixtron.”

Aixtron responded that the Obama administration’s order applied only to its American business and did not stop the Chinese group from acquiring its shares. Meanwhile, the Chinese Foreign Ministry in Beijing responded by saying, “A normal commercial acquisition deal should be considered using commercial standards and market principles. We don’t want the outside world to overinterpret this commercial activity from a political angle nor to add political interference.”

In the initial phase of China’s development, investment flowed chiefly into the People’s Republic. Foreign companies built up their positions in the world’s largest developing market and played a central role in modernizing everything from consumer goods to industrial machinery, followed by high-speed trains and electronics. But then, the Chinese started shopping overseas. It started with raw materials, logically enough given the country’s shortage of vital industrial inputs. China pushed into Africa, Latin America, and Australia in search of iron ore, copper, and other hard commodities. There were also less successful efforts to purchase large tracts of land to grow food for the country’s 1.4 billion people.

But the shopping list now seems limitless, ranging from real estate to cinema chains, luxury yacht makers, and breakfast cereal and meat processing firms. Annual outward investment has soared to more than $100 billion a year. China’s spending in Europe alone has totaled around €50 billion since 2000, with the largest investment in Britain followed by Germany and France. Chinese investors have bought up everything from Volvo cars to Pirelli Tires and the Club Med resort chain.
Now, some fear that Chinese buyers – backed by the government in Beijing and cheap loans from state banks – will purchase whatever they fancy, with an emphasis on acquiring technology China lacks in key fields.

The Mercator Institute for China Studies in Berlin (MERICS) and the US research company Rhodium Group released a joint study last year predicting that the People’s Republic would be one of the biggest crossborder investors by the end of this decade, with its offshore assets surging from $6.4 trillion to $20 trillion by 2020. Much of that will be in the form of portfolio investments and accumulation of foreign exchange reserves, but its total global stock of outbound foreign direct investment (FDI) was set to almost triple from $744 billion to up to $2 trillion by the end of the decade, with flows to western countries rising fast, according to the study.

Welcome and Fear

This would be a natural development for a country that started late and still lags far behind developed nations when it comes to the FDI share of GDP. In fact, China’s FDI/GDP ratio is still under ten percent, compared to three times as much for the US and almost four times as much for Germany. Investments in raw materials, meanwhile, will fall: the PRC will always need hard commodities, but the shift toward consumption and services and away from manufacturing growth will reduce that demand.

Intense price competition in many non-state sectors means that overseas investments offer a higher rate of return, particularly in utilities. And some companies and countries have actually welcomed Chinese investment because they need the capital and value the connection to Beijing.

The challenge is inescapable for Western countries struggling to cope with China’s impact. World governments and the EU will have to confront the natural repercussions of China’s growing presence in a world that both welcomes and fears the People’s Republic.

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© REUTERS/Kirsty Wigglesworth/Pool

As it moves away from Deng Xiaoping’s advice to “hide its brilliance and bide its time” in favour of a foreign policy more in keeping with its economic weight, China is steadily expanding its reach abroad – and not just in its traditional relations with countries that supply it with resources, but also further afield in Europe. And Britain, for its part – though its trade with the People’s Republic remains well below that of Germany and France – is making every effort to prove itself “China’s best friend” on the continent, as Prime Minister David Cameron and Chancellor of the Exchequer George Osborne put it when Chinese President Xi Jinping made a state visit to the United Kingdom in October.

For Osborne, Chinese investment offers are a godsend, as he is currently facing the quandary of reducing the budget deficit while meeting election pledges to increase spending on infrastructure. It remains to be seen how well these investment offers will translate from the big numbers thrown around during the visit – totaling tens of billions of pounds sterling – into real and complete projects in regional regeneration, a high-speed train link between London and Birmingham, and nuclear power stations on the west and east coasts; the rail link in particular has aroused widespread opposition from people living along the route, and the price of electricity generated by the nuclear stations seems likely to be high, quite apart from questions about the reliability of the technology to be used, especially if China builds a station in eastern England. But there is no doubting the enthusiasm the government is showing for its Chinese connection. It has been careful not to mention sensitive subjects such as human rights after Beijing expressed its disapproval of Cameron’s 2012 meeting with the Dalai Lama.

The rapprochement between London and Beijing, which Osborne calls a “golden age” of Sino-UK relations, fits into a pattern of a more expansive Chinese foreign policy at a time when the country is suffering a slowdown in economic growth. With relations with the United States frozen by disputes ranging from freedom of navigation to cyber espionage, the People’s Republic wants to find new friends across the globe. It has launched the “One Belt, One Road” initiative, along with other programs to dispense aid and investment to countries including South-East Asia, Russia, Pakistan, Brazil, and the -Stans of Central Asia.

For Britain, as well as inviting a flow of investment funds from the world’s second largest economy, the hope is that the City of London will become the predominant Western center for trade in the Chinese currency. For Beijing, there are economic motives for the investment: in particular, it should provide orders for companies that are suffering from the economic slowdown on the mainland and want to export some of their export capacity. It should also be seen as one step in the Xi administration’s broader efforts to extend its foreign policy reach beyond Asia.

The Chinese president’s visit to the United States In October for a summit with President Barack Obama produced little in the way of meaningful agreements, and the American navy subsequently sailed a destroyer around South China Sea reefs on which China has built military bases in water claimed by the People’s Republic. There is a trust deficit between the two powers, leading China to try to strengthen relations with European countries.

Internationally, China can now rely on Britain to tacitly approve its actions – for instance in Tibet, or even Taiwan should cross-Strait relations grow more tense following the likely victory of the Democratic Progressive Party (DPP) in the Taiwanese presidential election in January. Russia, China’s other new friend, and Britain are both permanent members of the United Nations Security Council, so the People’s Republic will have enough friends to be able to deflect critical motions at the international body.

In Europe, Britain can be expected to support the free trade agreement Beijing wants and grant China market economy status, which would make anti-dumping measures more difficult. The People’s Republic has also been seeking to strengthen ties with other major European countries – French President François Hollande and German Chancellor Angela Merkel have both just visited China. Their two countries enjoy much higher trade with the mainland than Britain, but they also take a less mercantilist approach to the relationship than Cameron and Osborne: Merkel used her visit to talk to Chinese leaders about Syria and the European refugee crisis, while for Hollande the UN Conference on Climate Change in Paris was the core issue of discussion with Xi Jinping. Both leaders want to leverage their countries’ commercial link with China to develop a broader political relationship in which each side speaks frankly without letting the financial aspects of the relationship predominate; Merkel even had a special meeting in Beijing with human rights activists and political dissidents.

Britain, on the other hand, has chosen to limit its relationship to economic links, an area in which China clearly has the strongest hand. It says it will act as Beijing’s advocate in Europe, a role which is bound to have an impact of foreign policy; for instance, in any dispute between China and Japan, would the UK feel free to back Tokyo if it felt Japan had the stronger case? Cameron and Osborne may regard the short-term benefits of an influx of Chinese money as justifying any longer-term political price. But, unlike Merkel, they have tied their hands in advance, and signalled a decline in their country’s global freedom of action.

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